There are many who may find trading the Japanese yen against the United States dollar (USD/JPY) a complicated proposition. However, when the Japanese yen is understood in terms of bills, notes, and treasury bonds of the United States, it is likely to become less complex. Kavan Choksi, a top finance expert, says that the key driver of this currency pair is not just treasuries, but also interest rates in both the United States and Japan. This means is a measure of risk that determines when to purchase or sell USD/JPY in terms of interest rates. The direction of interest rates determines the direction of this pair.
Kavan Choksi sheds light on USD/JPY as a currency pair
USD/JPY is the abbreviated term for the currency exchange rate for the U.S. dollar and the Japanese yen. The pair basically shows how many yen is needed to buy a single United States dollar, making them the quote currency and base currency respectively. The exchange rate of this pair is quite liquid and pretty widely traded. The fact that much like the U.S dollar, Yen is also used as a reserve currency is a major reason for the liquidity and high trading of this pair.
Currency traders typically know that the ideal time to trade USD/JPY is between 8 a.m. and 11 a.m. ET. There shall be a higher chance of finding the biggest price moves during this three-hour period, as there shall be more movement and volatility in the market. Even though the markets in Tokyo are not open, they are open in both London and New York.
The USD/JPY currency pair is known to have a close correlation with U.S. Treasuries traditionally. When yields on Treasury bills, notes, and bonds rise, the Yen ideally weakens relative to the dollar. This happens as people are able to borrow yen more cost-effectively, for the purpose of buying higher-yielding dollars. Typically, higher interest rates increase the value of the currency of a country. As a result, increasing interest rates in the U.S. commonly causes the United States Dollar to strengthen relative to the Japanese Yen. Yield or the rate of interest paid on a Treasury instrument is known to have an inverse relationship with bond prices. As a result, a flight to liquidity occurs when yields slump, and this liquidity must find a home, which is where currencies can become too attractive.
As per Kavan Choksi , the USD/JPY pair can also be a determinant of market risk. For example, when markets are in search of risk trades, Treasury bond yields rise as the economy grows. Yields are also a signal of risk. In the case that panic or fear hits the markets, Treasury bond prices tend to rise, causing yields to fall. In such a case, the price of the U.S. dollar can weaken against the Yen. However, Japan has maintained pretty low interest rates for quite a while, leading to the yen’s status as the premier funding currency. For instance, by selling lower yielding currency like the yen with current rates below its key trading partners, including the United States, investors can explore higher interest rate instruments within important trading partners for the purpose of carry rate.